Rising Sun, Setting Sun

Prime Minister Shinzo Abe’s ‘three arrows’ plan to escape deflation and revive Japan’s economy ignited a rally in Japanese equities – and a big decline in the yen. Is Abenomics another false dawn? This is no academic matter. Japan is still the world’s third-largest economy and a big weight in many foreign investor portfolios. We gathered in Tokyo to debate Japan’s uncertain future.

Our main conclusions:

• We are struck by the broad support for Japan’s reform agenda. What is different this time? A national sense of urgency this is Japan’s last chance to revitalise in the face of a fast-growing rival: China.
• The first two arrows of Abenomics – monetary easing and fiscal consolidation – have driven Japan to the base camp of the mountain. Now the private sector must take the reins and embrace risk. The trek ahead looks more like Everest than Mount Fuji.
• The Bank of Japan (BoJ) appears fully committed to doing whatever it takes to hit a 2% inflation target. A weaker yen helps – yet the broader economic impact of currency depreciation is limited. Japanese exporters have shifted much of their manufacturing capacity overseas.
• Wage growth is key to rekindling inflation. Recent salary hikes by big companies such as Toyota (and labour shortages in sectors such as construction) are encouraging signs. The key question? Will small- and medium-sized enterprises (which provide 70% of jobs) follow?
• Japan’s huge debt load (243% of GDP) is a worry. The BoJ’s largesse should keep a lid on Japanese yields for the time being – but without stronger economic growth (and a healthy dose of inflation), it is hard to see Japan escaping its debt trap.
• Key reforms are deregulating inefficient sectors such as retail and agriculture, improving corporate governance and cutting corporate taxes. Plans to designate (parts of) Tokyo and other major cities as ‘special economic zones’ could help revitalise corporate Japan. Entrepreneurs welcome!
• A proposal to cut the bond allocation of Japan’s $1.2 trillion Government Pension Investment Fund (GPIF) could herald a broader shift by Japanese investors into equities and alternatives (including foreign assets).
• A rise in Japan’s consumption tax from April could slow growth in the near term (as it did the last time Japan raised the tax in 1997). Monetary policy combats deflation, but is unlikely in itself to boost economic activity.

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